COT Reports, Part 3

This is Mani’s 6th article about market sentiment. You can view his previous articles here: 1|2|3|4|5
You can follow Mani on twitter.

Here we are in the third part of COT article series and I’m going to show you how we can find market extremes in currency or commodity market.
Before reading the entire article I highly recommend you to read COT Reports, part 1 and 2.
Just remember that Lamborghini case, assume a situation that Speculators are extremely long or short and Commercials are extremely short or long.

Again I want you to see this chart:

COT Extremes
COT Extremes

That blue arrow shows on that date we had a great difference between net number of long contracts that commercials had and short contracts that speculators had; This is what I called “Market Extreme”

  • Second Approach:
    I’m going to show you a numerical approach to make an Index of these COT reports; COT Index is a number between 0 to 100 that indicates market extreme and also trend following opportunities.
    This index will reflect the difference between net commercials and net speculators so the very first thing that I’m going to do is to calculate net comm. and net specs.
    Table below shows us these numbers for EUR contracts from early 2010 till 2nd November :

    Table of EUR Contracts
    Table of EUR Contracts

    So to calculate net numbers simply subtract longs from shorts and do not use absolute-value of these subtracts as we want to determine if those groups are net short or net long.

    Second thing that this Index must reflect is the difference between comms. and specs. so I’m going to subtract “net specs.” from “net comms.” and name it to the “Composite COT” and all processes I’m going to do from now on depend on Composite COT.
    Composite COT reflects the difference between net specs. and net comm. but there is another concern here that we should pay attention to; How we can reflect the extreme situation in the Composite COT?
    It’s too simple, Microsoft Excel has made any calculations simple and for this instance I’m going to use “PERCENTRANK” syntax in my spreadsheet. This function can be used to evaluate the relative standing of a value within a data set, so we can simply determine the rank of the current Composite COT in our data set and see if there is any extreme conditions.

    Here there is another concern that it’s too important, How many data I should include in my data set?
    COT reports are published weekly, so in a year we have got around 52 reports, therefore there will be 52 Composite COT numbers.
    Using last 52 Composite COT numbers is the best way of calculating PERCENTRANK in the data set and I’m going to name it to COT52 Index.
    This could be our longer term COT Index, and if we use 13 or 26 data in our analysis we reach the shorter term COT Indexes called COT13 Index and COT26 Index.
    Reading of 100 or 0 in COT Index indicates market extreme and possibility of a reversal.

    Graph below shows us these COT Indexes for EUR from early 2009:

    COT Indexes Graph
    COT Indexes Graph

    Do not make it difficult, It’s too simple and I want to inform you that I’m going to write a weekly COT report analysis every Saturdays but if anyone is interested in my Excel spreadsheet please do not hesitate to contact me, just send me a message with twitter and I will be in touch with you.

    In the last part of the COT reports I will discuss accurately about how we can use COT Indexes in our analysis.


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